Stimulation Without the S-Word

Posted on Oct 7, 2009

So now we know: The economic stimulus plan passed by Congress at the beginning of the year was not big enough.

We also know this: Once it secures a health care bill—yes, it will get one—the Obama administration from that moment to the 2010 midterm elections will be all about jobs, jobs, jobs.

In the face of persistently high unemployment, the administration’s economic advisers have been reviewing proposals to create jobs, and President Barack Obama’s aides insist they knew all along that the original stimulus, as one of them put it, would “never fill the full gap from the recession.”

For political reasons, what comes next will not be called “a second stimulus,” but further stimulation is very much on the mind of an administration that hoped unemployment would be dropping by now.

Already, we are seeing the beginnings of a debate that will get us nowhere. It involves those who say that the stimulus worked and those who say it didn’t. This is nonsensical because the stimulus has certainly “worked” as far as it went. Just about every respectable economist believes that without it, the economy would be in worse condition than it is now, and that heavy spending from the stimulus this year will prevent even more severe employment losses.

But this has been such a profound, job-destroying recession that even $787 billion wasn’t sufficient, and changes made to secure some bipartisan support in the Senate last February rendered the stimulus less effective than it might have been. It should, for example, have included even more help for state and local governments, and there was no good reason to cut school construction money that the House had approved.

Moreover, pretending as Congress did that an expensive fix in the alternative minimum tax was “stimulus” simply wiped away $70 billion that could have been used for programs or tax cuts more likely to put people to work.

The White House is in a position of simultaneously defending the stimulus and urging that we do more. While the recovery act “has been a major contributor to stemming job loss and saving and creating jobs,” said one administration official, “we’ve always known that additional measures for job creation were something the administration would support and plan for.”

It is a sign of the gravity of unemployment that even liberals who typically see business tax cuts as a highly inefficient way to reduce unemployment are now supporting a tax credit for new jobs—an idea that was knocked out of the original stimulus proposal.

Larry Mishel, president of the Economic Policy Institute, a liberal think tank, does not believe that the tax credit is sufficient on its own, and he continues to favor public works jobs, especially in areas of very high unemployment.

Nonetheless, Mishel said he now supports the tax credit because unemployment is so stubbornly high. “It’s such a desperate situation,” he said, “that we need to do things that move the dial.”

The administration and the Democratic Congress are also likely to move quickly on traditional ways to pump money into the economy by helping Americans most hurt in the downturn. These include extending unemployment insurance, expanding food stamp coverage and offering more help so the unemployed won’t lose health insurance. All have a high economic return because the recipients, because of need, spend the money quickly.

With so many states now being forced to cut their budgets and raise taxes at the same time—the exact opposite of a stimulus—more direct assistance to states is also likely to be part of a new jobs package.

Like the job-creation tax credit, helping states might find some Republican support. Moreover, 19 of the 37 governorships at stake in 2010 are now held by Democrats, and many of those statehouses are vulnerable to a Republican takeover. By easing the states’ fiscal situations, an infusion of new federal money could also bolster the political standing of the party that holds power.

At least some economists, according to administration allies, are also suggesting ways of extending easy credit to American manufacturers and boosting government purchases of American-made products.

A more aggressive approach to jobs is inevitable because high unemployment over a long period not only is a social and economic calamity but also stands as the biggest obstacle Democrats face in the 2010 voting. Rarely have an administration’s economic and political imperatives been so closely aligned.